Bubble, what bubble?

For the first time since the onset of the ‘credit crunch’, the news about the property market is almost universally good. But don’t get carried away.

RICS Scotland reports today that surveyors are increasingly upbeat about the market with a leap in demand and prices rising. A net balance of 29% more Scottish surveyors predict more price increases over the next three months and 56% believe that prices will rise over the next year.

A little earlier, the Council of Mortgage Lenders reported that lending to first time buyers was at its highest level since 2007. Mortgage approvals, as recorded by the Bank of England, are well ahead of the same time last year (see here for a recent post on this).

And the Registers of Scotland’s latest report shows a sharp rise in sales across the country and prices recovering most of the ground they had lost earlier this year. You can find the full report here.

Finally, figures from the Office for National Statistics showed that house price growth in June accelerated with prices rising 3.1% year on year, compared to 2.9% a month earlier. You cann find that here.

So, everything in the garden is rosy and we are back to normal? Not quite.

It is clear that the market is improving now and is likely to continue to improve as the year goes on, but there are two important points about prices that everyone needs to understand.

Local is what matters

Firstly, the ONS figures are an average for the UK as a whole. The figure for Scotland showed a year on year fall of 0.9%. Even within the Scottish average there will be a wide variation in price trends with some areas seeing gains and others seeing falls. So, don’t be mislead by good news stories based on UK data. The more closely the data relates to your area, the more likely it is to be applicable to your home.

No boom in prices

Secondly, it is very, very unlikely that this is the start of a sustained rise in house prices.

For prices to rise, real incomes (i.e. after the effects of inflation are taken in to account) have to have risen faster than house prices at some point and/or interest rates have to have fallen to a point at which buyers can afford to borrow more on their existing income.

In the last boom, both happened. It was triggered by real income growth that made property look cheap and it was sustained by historically low interest rates.

Today, we already have astonishingly low interest rates and, even with the Bank of England’s new policy of forward guidance (you cann find out more here), they are unlikely to fall much further.

And real incomes continue to be squeezed. The Office for National Statistics says that average hourly earnings have fallen 8.5 per cent since 2009 in real terms. We estimate that prices today are about 17% below where they were at the peak of the market in the summer of 2007 (and that doesn’t take inflation in to account), so there has been some improvement in affordability, but the simultaneous fall in prices and incomes means that the improvement is not as great as it might have been and there is little sign of a sustained rise in incomes.

In sort, the money is not there to push prices much higher and a sustained increase in prices is only likely to happen when wage packets start to grow.

That’s not such a bad thing. Looking back at the last property market recession (in the early 1990s) prices in Scotland pretty much trod water for several years as incomes caught up with an earlier jump in prices. The chances are that that is likely to happen again this time round.